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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Plant and machinery leasing - Anti-avoidance: Long funding lease rules: Disposal values: Lessor disposal value reduced by liabilities

Leases entered into on or after 1 April 2006

Another method used to reduce the lessor’s “net investment in the lease” involved the lessor funding the purchase of the plant or machinery asset partly by way of a non-recourse loan (a loan where the creditor in the event of default has recourse only to the plant and machinery to recover his debt and not to any other assets of the debtor). The net investment in the lease as recorded in the accounts of the lessor was reduced by the amount of this loan and consequently resulted in an inappropriate disposal value for the lessor on the granting the long funding lease.

A similar method was used with the funding being obtained through the issue of share capital that fell to be treated as a liability of the lessor company.

Leases entered into on or after 12 March 2008

To address both of these cases legislation was introduced at sections 61(8) and 61(9) CAA 2001, effective for long funding leases granted on or after 12 March 2008.

Section 61(8) CAA 2001 ensured that the net investment in the lease was adjusted to the amount it would have been if the lessor had no liabilities of any kind (but only if to do so has the effect of increasing the disposal value given by item 5A of the table at section 61(2) CAA 2001).

Section 61(9) CAA 2001 then expanded the subsection to include as a liability any issued share capital which fell to be treated as a liability for accounting purposes.

Leases entered into on or after 13 November 2008

Sections 61(6)-(9) CAA 2001 were repealed for leases whose inception was on or after 13 November 2008. At the same time item 5A in the table within section 61(2) CAA 2001 was rewritten so that disposal value was the greater of the ‘qualifying lease payments’ and the market value of the plant and machinery, and so had no regard to how it was that the lessor funded its purchase.